Following the 16.5 per cent rise in inflation, policy analysts have advised the Central Bank of Nigeria (CBN) not to tighten (raise benchmark interest rate) Monetary Policy rate further, as this could stifle growth and increase unemployment in the economy said to be in recession.
The July inflation according to the National Bureau of Statistics (NBS), rose to highest price level in Nigeria since October 2005, (11years) when it was 18.6 per cent.
The CBN only recently reported that economic activities declined faster in June, confirming that the nation’s economy formally entered into recession in the second quarter of the year.
Ahead of the Monetary Policy Committee (MPC) meeting scheduled for next week, Olakunle Ezun, an analyst at Ecobank Transnational said it would not be appropriate for the MPC to tighten monetary policy as the country is already in recession and an increase in benchmark rate would further choke the economy.
He wants the fiscal authority to seek out ways to take the economy out of recession by taking proactive measures.
His words: “I don’t think it will be appropriate for the MPC to react with a hike in rates, based on the level of the inflation rate. Taking a second look at the items that are driving the rise in inflation, they are basically not monetary issues. It depends on how much the fiscal authority can respond to the imbalances that we have today in the economy.
“If technically the economy is in recession, it is not by hiking rates that the economy that it will be taken out of recession. I think there is a limit to how much increase they can do to address inflation. The focus should be on what the government is doing to help the economy through employment creation and others. Going forward we may start seeing a drop in inflation rate because of all these items.”
Analysts at Cowry Assets Limited said the inflationary pressure will remain for the remaining part of the year, as long as Nigeria’s foreign exchange mechanism and export earnings remain challenged.
For the fact that the equity and other market are expected to be negatively impacted by higher interest rates, Cowry Assets managers in their note to investors wants the interest rate to remain at the level it is if not reduced further.
“The equity market is expected to be negatively impacted by higher interest rates. Hence, a reduction in consumer confidence will be an indicator of future decline in output. We expect fixed income investments to remain attractive as investors are compensated with higher yields, subject to favourable exchange rate regime,” the analysts said.
High inflation according to the analysts means reduced purchasing power of consumers which constitutes the highest chunk of Gross Domestic Growth the Cowry Assets analysts stated.
Nigeria now ranks as the country with the 8th highest inflation in Africa. The impact of persistent inflation is erosion in value and confidence of economic agents. The market is expected to react accordingly to the trend of rising inflation.
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